Investing

What bitcoin isn’t

Any currency has to have two characteristics. It must be accepted as a medium of exchange and it must serve as a store of value. Bitcoin fulfills neither. Picture: Chris Ratcliffe/Bloomberg

It’s the question that everyone seems to be asking: “should I invest in bitcoin?”

One can understand the excitement. In March this year, one bitcoin traded at under $950. On September 1, it reached just a fraction under $5 000.

That is phenomenal growth in just a matter of months. It’s not surprising then that people are wondering if they shouldn’t get involved.

However, when asked exactly this question at the Sasfin Beyond Global Wealth briefing in Cape Town last week, global chief economist at UBS Wealth Management, Paul Donovan began his answer by questioning its premise:

“Going to Monte Carlo would be a better option,” he said. “It would be more fun.”

His point was that there is really no such thing as ‘investing’ in bitcoin. If you’re buying bitcoin, what you’re doing is speculating.

This is true for all cryptocurrencies, he argued, because of one very important fact: they are not, and will never be actual currencies.

As Donovan explained, any currency has to have two characteristics. The first is that it must be accepted as a medium of exchange.

“No currency has intrinsic value,” he said. “Currencies are only worth something because you can get something useful in exchange for them. Someone else must be wiling to accept them in return for goods and services.”

While it’s true that bitcoin and a number of other cryptocurrencies are accepted by some online retailers and other businesses, Donavan argued that there is a good reason why they would never gain universal acceptance.

“The largest transaction in almost any economy is paying taxes,” he explained. “Tax revenue is typically between 30% to 50% of any economy. But governments don’t accept bitcoin and never will, because they know that being the monopoly provider of money is a huge economic advantage. They will never throw that away. As a result you will never have these cryptocurrencies accepted as a medium of exchange for the single biggest transaction in any economy.”

The second characteristic of any currency is that it must serve as a store of value.

“If you are going to use something as a medium of exchange you want to have a reasonable expectation that what you can buy with it today, you will still be able to buy with it tomorrow,” Donavan explained.

This is why when an economy experiences hyper inflation, the currency essentially loses its status. The Zimbabwe dollar is an obvious example.

That is the extreme, however, because in a normal, high-inflation environment there is still an expectation that there are ways you can invest your currency for it to retain its purchasing power. It therefore still serves as a store of value.

In the case of bitcoin, however, its value as measured by its price against the US dollar is extremely volatile.

“You just have to look at that level of volatility compared to the volatility of genuine currencies to realise that this isn’t a store of value mechanism.”

This doesn’t however mean that Donavan doesn’t see value in the technology behind it.

“The blockchain is essentially an efficient transmission mechanism,” he said. “UBS and other banks, even some central banks, have adopted blockchain technology that speeds up transactions between the major banks of the world. But you need to separate the underlying technology, which is rather dull, from bitcoin itself, which might be exciting, but it’s not an actual currency.”

COMMENTS 26

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‘His point was that there is really no such thing as ‘investing’ in bitcoin. If you’re buying bitcoin, what you’re doing is speculating.’ – how is that different to investing in equities, bonds, property etc. Every investment action has a degree of speculation. Just ask some of our top asset managers who went long on African Bank……

I would also not get too caught up on the term ‘currency’ – it is the blockchain technology that is key here. As for Bitcoin – its value lies in it being a leader within this blockchain technology coupled with its limited supply. The latter characteristic should not be underestimated in terms of its long term value potential – after all it is the key driver of the value we see in gold, diamonds etc – what practical use do these rare minerals offer us other than their limited supply?

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The difference is that you get dividends/rents from other investments plus hopefully capital gains in some cases. Bitcoin does not offer return just capital gains if you are lucky which is typical of the speculative “investments”.
Other currencies are used to buy lot of things, but Bitcoin and similar cryptocurrencies are accepted by only a few places. As I see now the main use of these funny moneys is paying for illegal stuff like drugs. At the moment there is no proper exchange between the mushrooming cryptocurrencies. I can order stuff from the EU, USA, China etc using SA Rand based credit card, but can not do it using Bitcoin or any of the similar currencies.

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Investing: Buying something that produces value, for example rental property, businesses, farms, etc.
Speculating: Buying something and hoping somebody will pay you more for it in the future even if what you bought has not changed at all. For example, an empty plot, bitcoins, gold, art, etc.

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Speculating:: Buying something that produces value, for example rental property, businesses, farms, etc.
Speculating: Buying something and hoping somebody will pay you more for it in the future even if what you bought has not changed at all. For example, an empty plot, bitcoins, gold, art, etc

If you asked which is the best thing to invest….oops, speculate in right now, I would say crypto

At least it is a killer service that will undoubtedly be adopted universally

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Hazak Gold and diamonds have had a long history of actually being utilized as a medium of exchange, it is limited yes, which only maintains its value. But because the bankers decided it was better to change currencies to fiat in order for the bankers to have more control and the power to literally just print money so that the economic system itself has to fail at some point and when they choose. The danger with bitcoin is two fold. The blockchain system in trading in bitcoin is a danger to the current banking cartel system as it encourages anonymity and a medium of exchange that challenges the current banking system.To the banking cartels this is a danger for them. Since the banking industry has created and plays the system very well of orchestrating financial crashes by literally just shaving a couple of zeros off the market because they can, remember cash does not have anything for it to be backed i.e gold. Cash has no real value, but the value that it has depends on whether its buying power is strong or weak. Where the second danger comes in is with bitcoin itself having a monetary backing. Bitcoin is valued and backed by fiat currency. What we are seeing is the value of bitcoin rising in terms of the global fiat standard currency. Its shoot to abnormal value that is now surpassing that of gold is going to lead to the banking industry regulating it, or causing the cash value to drop by weakening the currency its backed by. If bitcoin was rather back by gold (which it will never be because its not real) it would be another story but also bitcoin would never be valued at what it is currently. Yes Hazak i agree on the blockchain system, but bitcoin itself is a threat to the banking industry. There is a reason China bought 3 trillion dollars worth in actual gold to hold and bans bitcoin. Bitcoin has the potential somehow of being backed by gold if it becomes a legitimate currency and chooses to be backed by gold rather than a fiat global standard currency.

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@the eyes.
In general cash is worth only the paper it is printed on and bitcoin is not even worth the paper it isnt printed on. Governments hate bitcoin, how do you tax something you cannot trace or follow?

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The computer you used to type the message? It has gold wires in its I.C.’s. Plastic cuts fingers.Brass cuts plastic. Steel cuts brass. carbide cuts everything and diamond cuts carbide.
Ask the Germans how hard it is to make things without diamonds gold has bought things for thousands of years.

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Isn’t all of investing based on speculation? I’ve been researching the crypto sphere for a few months now and finally made the jump (better late than never). The blockchain technology seems like where the world is headed and despite it being “speculation,” I think it’s a pretty smart one.

If any of you are still trying to figure out the crypto-sphere, I highly recommend using bitbasic.io They were the easiest guide to follow. My friend recommended me to the crypto guide and I can’t thank him enough. (Also, I’m actually glad I waited. Now that the markets are crashing, it’ll take a bit of time before they correct. Buying in when the “price” is low is always a win.) Cheers!

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All the people who have bought into bitcoin and experienced the meteoric rise in value, i applause you. But before the shit hits the fan sell it and earn before they turn its value to shit. Use China as a lesson, 11 % in one day, I say sell now

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So much wrong with this article. It is a currency, when I speak to foreigners they want dollars or bitcoin, never heard of Randellas. Thats what happens when you ask an economist about business. Also have you ever tried to send money offshore, do you know how much it costs?? Even with a private bank you are looking at single percentages. Do you know how much it cost to send R 1 mil bitcoin for me, R40. But what really made me chuckle is envoking tax, all the wealthy people iv met in my short life dont like paying tax, hell some dont even pay ANY tax. Please get real.

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A few questions I have about bitcoin: (1) Is it possible to change your bitcoins back to any currency at the click of a button? (2) what guarantee is there that additional bitcoins will not be added in time to come? (3)What happens to bitcoin value if the US FED / IMF / World Bank introduce an ‘official’ cryptocurrency in 2/5/10/20 years ?

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1) Yes, you can buy and sell the at a click of a button
2) Bitcoin is open source and needs consensus to make changes to the limit of 21 million. You would never get the entire community to agree to change the rules and allow more bitcoin to be created, making their existing bitcoin worth less.
3) There are already thousands of other cryptocurrencies, and there will be more. The point of bitcoin is to not need the middle man. If the US FED / IMF / World Bank make their own, they will be in the middle to take their ‘cut’. Why would anyone choose that over bitcoin?

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The tax angle is quite clever and something I didn’t think about. If cryptocurrencies did take off however, I think Governments would be forced to start considering them for tax. Especially because it is much harder to track than normal currencies.

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One could apply the same arguments as the author makes against any hard asset or store of wealth, say fine paintings (which have their fashions) or postage stamps. Indeed, in the case of stamps, some governments abused their monopoly to print first day covers purely for the collecting trade that Stanley Gibbons refused to recognise them.

One could argue that Diners Club or Amex cards are not universally accepted so are not worth anything.

The entire point of Bitcoin is to take power away from the government-banker complex, which has proved to be irresponsible.

While conventional economics recognises money as a unit of accounting, store of wealth, etc, it does not seem to take into account that people also look for a concealing of wealth (think of bearer shares)… apart from their anonymity, bitcoin seem to have the lowest transaction cost, as The Hun points out, the classic medium of exchange.

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You have forgotten one thing, there are several other cryptocurrencies in use, nothing prevents you or anybody else to start up a new one using the same principle. All it needs is one large bank or country to set up one and they will corner the legal market because people will trust it more. In that case Bitcoin will remain as the favourite for drug dealers.